What are the regulatory mandates regarding entry and exit loads in mutual funds under SEBI regulations?

[ A ]Entry loads of 2.5% are mandatory for all retail investors to pay distributor salaries.

[ B ]Entry loads are completely banned; exit loads collected must be credited back entirely to the scheme immediately, with no discrimination among unitholders based on subscription amount.[ CORRECT ]

[ C ]Exit loads are retained 100% by the AMC as corporate quarterly bonuses for fund managers.

[ D ]Exit loads can be arbitrarily increased on past historical investments with retrospective effect.

Takeaway

Option B is correct: Entry loads are completely banned; exit loads collected must be credited back entirely to the scheme immediately, with no discrimination among unitholders based on subscription amount.

Derivation

Under SEBI regulations: (1) Entry loads are completely abolished, so the sale price equals the scheme NAV. (2) Exit loads can be charged to discourage short-term churn, but all exit load proceeds must be credited back immediately and entirely to the scheme itself (boosting scheme assets). (3) Parity on exit load must be maintained across unitholders without distinction based on investment size, and load enhancements apply only prospectively. (4) No exit load applies to bonus or dividend reinvestment units. This tests load rules. The primary error is thinking AMCs retain exit loads.

Why the others fail

A — Entry loads of 2.5% are mandatory for all retail investors to pay distributor salaries.

Entry loads are legally prohibited across all mutual fund schemes in India; distributors are paid via AMC trail commissions.

C — Exit loads are retained 100% by the AMC as corporate quarterly bonuses for fund managers.

Exit loads are never retained by the AMC as corporate revenue; they are credited 100% back to the scheme to benefit remaining unitholders.

D — Exit loads can be arbitrarily increased on past historical investments with retrospective effect.

Retrospective load enhancements are strictly barred; any imposition or increase in exit load applies exclusively on prospective investments.